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Accounting-based downside risk and expected stock returns: Evidence from China

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  • Luo, Yan
  • Wang, Xiaohuan
  • Zhang, Chenyang
  • Huang, Wei

Abstract

We document that earnings downside risk contains information on firms' future operating performance and is positively associated with expected stock returns in Chinese stock markets, and the return predictability of earning downside risk mainly comes from its accrual downside risk component. The pricing of earnings downside risk is especially evident among firms with more transparent information environment and stronger governance efficacy, such as large firms, non-high-tech firms, old firms, and firms with high analyst coverage. Lastly, we show that aggregated earnings downside risk and its components at the market level are all significantly and positively associated with subsequent stock market returns, which is consistent with the notion that the accounting-based downside risk measures contain information about future macroeconomic conditions.

Suggested Citation

  • Luo, Yan & Wang, Xiaohuan & Zhang, Chenyang & Huang, Wei, 2021. "Accounting-based downside risk and expected stock returns: Evidence from China," International Review of Financial Analysis, Elsevier, vol. 78(C).
    • Handle: RePEc:eee:finana:v:78:y:2021:i:c:s1057521921002465
    DOI: 10.1016/j.irfa.2021.101920
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    More about this item

    Keywords

    Accounting-based downside risk; Information environment; Stock returns; Chinese stock markets;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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